Bank Research Consensus Weekly 08.06.12
FX: Finally Support for EUR/USD
Arne Lohmann Rasmussen, Chief Analyst, Danske Bank
It was an initial disappointment for the market that the ECB did not this week deliver a full roadmap on how to bring down government yields in Italy and Spain and make the monetary transmission mechanism work. EUR/USD fell almost two big figures on Thursday afternoon following the ECB press briefing. However, in our view it does not necessarily mean EUR/USD should fall like a stone over coming weeks and months. ECB President Mario Draghi was fairly clear that the ECB would reactivate its bond purchases in the secondary market if one or more countries asked the European Financial Stability Facility (EFSF) to buy its government bonds. It appears likely that it is only a matter of days or weeks before this happens. Basically, the ECB is once again using its power to put pressure on European politicians and in our view it will work. However, financial markets are not patient, meaning that until the EFSF is asked to activate the bond purchase programme uncertainty will prevail, the underlying negative euro sentiment is likely to continue and EUR/USD might gradually continue to move lower – and potentially all the way to 1.20 if days pass and nothing happens.
FOMC Stays the Course
John E. Silvia, Chief Economist, Wells Fargo
The statement from the FOMC’s meeting this week indicated that the committee will not provide further monetary accommodation at this time. The committee noted the slower pace of employment growth and the decelerating pace of economic growth. The committee also cited the decline in inflation since the beginning of the year with future inflation below the rate consistent with the committee’s dual mandate. The committee expects growth conditions to improve, however the pace of improvement in the short term will remain moderate. In addition, the ongoing European Debt crisis continues to “pose significant downside risks to the economic outlook.” The committee chose to maintain the low Federal Funds rate environment through the end of 2014, language that has been consistent since the January meeting of the FOMC.
U.S. – In a Rut
Chris Jones, Economist, TD Bank Financial Group
After a week of mixed data and an FOMC announcements that failed to impress, financial markets were given some relief with Friday’s payroll report. The U.S. economy created 163K new jobs in July, above market expectations for 100K, and a solid improvement on the 73K jobs averaged in each of the last 3 months. Equity markets responded in kind, with major indexes rallying. As of writing, the S&P 500 was up 2% on the day and is set to end the week in positive territory.
Compiled by David Song, Currency Analyst
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